LPI Capital saw a flat year in FY18 (net profit of RM314.1m), with 4Q18 net profit coming in at RM84.2m (-8.3% qoq; -0.4 yoy). LPI’s FY18 results were within our expectations, though 11% below consensus. The bulk of underwriting profit for FY18 was underpinned primarily by the fire (64%) and the miscellaneous (22.4%) segments, as the group continued to incur high claims especially from the motor segment, at 73.4% against the group average at 40.9% for FY18. Reiterate BUY, price target unchanged at RM18.90 based on a 3.2x P/BV target on 2019E BVPS.

FY18 Net Profit at RM314.1m; Final DPS of 42 Sen (4Q17: 37.5 Sen)

LPI Capital registered a FY18 net profit of RM314.1m, flat yoy as it saw overall higher net claims incurred especially in the motor and medical (under miscellaneous insurance) segments. Underwriting profit for FY18 was also relatively flat yoy as overall claims ratio inched up 2.4ppts to 40.9%. Nonetheless, we note that the year-to-date claims ratio trend was improving, from 47.1% in 1Q18 to 41% for 2Q18, 37.2%% for 3Q18 and 39.1% in 4Q18, largely underpinned by recovery in the motor segment. At the topline, we continue to see healthy gross written premium (GWP) growth of 3.4% yoy for FY18, driven by fire insurance at 11.1% yoy and motor insurance at 10.6% yoy. We saw a decline of 3.6% yoy in the marine/aviation/transit (MAT) segment and a -8.9% yoy growth for the miscellaneous segment.

Fire Policy-underwriting Still the Key Driver to Underwriting Profit

The fire segment contributed 42.2% of FY18’s net earned premium (NEP), followed by the motor segment at 30.9%, miscellaneous at 24.9% and MAT at 2.0%. Fire segment accounted for about 64% of FY18 underwriting surplus.

Reiterate BUY, Price Target Maintained at RM18.90

We Reiterate Our BUY Recommendation and Maintain Our Price Target at RM18.90, based on a 3.2x 2019E P/BV target. We maintain our FY19-20E earnings forecasts and introduced FY21E for LPI. Our key assumptions: i) GWP growth at 3-5%; ii) net earned premium growth at 5-5.6%; iii) net claims ratio at 38-39%. Based on LPI’s track record, its core net profit has not seen a decline since 2001, hence we believe that with management’s expertise in this industry, profits may likely resume growth with management’s move to exercise more caution in motor risk-underwriting as well as to roll-out more comprehensive fire insurance products, amidst a more liberalized market. Downside risks: price competition, spike in claims, higher fraud cases.

Source: Affin Hwang Research - 30 Jan 2019